Daily Newsletter, Wednesday, 3/20/2019

Table of Contents

Market Wrap

FOMC, Trade, Trump, Oh My!

by Thomas Hughes

The market took a dive even before the FOMC policy announcement on (more) mixed messages about the trade negotiation. Today's confusing news comes directly from Trump. He told reporters the Administration isn't talking about removing tariffs levied on China, they're talking about leaving them in place for a long time, years even. His reasoning is that we need proofs and guarantees China would uphold its end of the bargain and this is the way to do it.

The comments are in direct contrast to Trump's own words that a deal was coming along nicely, they are also in direct contrast to Beijing's desires. With this latest revelation on trade, it makes sense that Beijing would be pushing back against U.S. demands. Steven Mnuchin and Robert Lighthizer are scheduled to travel to China next week for another round of negotiation, if the talks are going to stall or break-down I think next week might be when it happens.

Market Statistics

The market surged after the FOMC policy announcement but the gains were short-lived. There were four key takeaways from the FOMC policy statement. Number 1, the FOMC left rates unchanged. They cited global risks and tame inflation as the primary reasons.

Number 2, the FOMC plans to end the balance sheet reduction at the end of September. They will begin to taper the runoff in May leaving the mortgage portion of the operation untouched. This will continue until September when all run-down operations will cease.

Number 3, the FOMC has lowered their GDP forecast for this year and next. The committee says 2019 GDP will be about 2.1%, down from 2.3%, while the forecast for 2020 fell only a tenth. The longer-run forecast was unchanged at 1.95.

Number 4, the committee says it will remain patient on expected rate hikes. While labor markets are expected to remain tight inflation projections fell a bit. The committee now thinks there will be NO rate hikes this year and then one the next. The market is now calling a 35% chance for a rate cut by December.

In Brexit news, the Article 50 deadline is less than 10 days away. Theresa May, at the behest of the UK Parliament, has officially asked for an extension of the deadline. The extension must receive the approval of all 28 EU member nations and is far from guaranteed. At this point it looks like the EU holds all the cards, the UK doesn't want to allow a no-deal Brexit and they may not have any other choice. The official EU stance has been, so far, no renegotiation and any request for an extension must come with compelling reasons.

Economic Calendar

The Economy

Mortgage applications are pointing to a rebound in home sales this spring. The number of applications rose 1.6% in the last week, the third straight week of increases, and the third new record in a row. The surge is driven by slowly falling mortgage rates, the caveat is that much of the gains are due to refinancing efforts. The rate on a 30-year fixed has fallen to 4.55% from 4.64% while the average amount has increased. The average loan amount is now $327,000 showing sales are skewed to the higher end of the market. Refi's are up 4% for the week and 3.5% YOY.

The Dollar Index

The Fed was arguably more dovish than the market was anticipating and sent the dollar moving lower. The DXY fell a half percent in the wake of the announcement and looks like it may move lower. The caveat is that the index is still trapped inside a range and there is little reason for it to move outside of it. While the dollar is weakening, so too are the economies of Europe, the UK, and Japan and that is going to keep this index moving sideways over the longer-term. Today's data included a CPI read from the UK that came in a few tenths below expectation. In the near-term a move to $95.50 is expected, a drop below that level may alter my viewpoint.

The Gold Index

Gold prices spiked on today's weaker dollar and may move higher. The caveat is that the spot price met resistance at the uptrend line that may keep the metal from extending the 2018/2019 rally. The indicators are bullish so upward pressure is present, the problem is that the MA may push price action to the side and resistance at $1,340 may be strong. While a dovish FOMC has weakened the outlook for interest rates and the dollar that outlook can only take gold so far, the FOMC is still on a tightening path however diminished it is. I'm still looking for a retest of the $1,280 support which raises the possibility of range bound trading over the next couple of months.

The Gold Miners ETF GDX reversed an early loss after the FOMC announcement. The miners ETF advanced to the end the day with a gain near 2.0%. The candle formed is long and green with a visible lower shadow so has come strength. The caveat is the candle is in the middle of a wide consolidation range with mixed indicators so not quite as strong as it could be. A move up looks likely at this point but resistance is at $23 and $23.50 that may keep the ETF trading sideways over the longer-term.

The Oil Index

Oil prices got a jolt from today's inventory data. Data shows much larger than expected draws for crude, distillates, and gasoline fueling the OPEC driven rally. WTI stockpiles fell nearly -10 million barrels versus the expected build of 0.3 million. Distillates fell -4 million, four times the consensus, while gasoline stockpiles fell 4.5 million, nearly double the forecast. WTI had been down in early trading but reversed when the news was released. The black gold gained a little more than 1.5% in today's session and moved above $60 for the first time in months. The indicators remain bullish so higher prices are expected although momentum is weak. My next target is $64.

The Oil Index gained more than 1.60% after today's inventory data. The data is good for prices, prices are good for earnings, and earnings are good for the sector; Nuff said. The index is now above the long-term moving average and looking bullish. The candle isn't really large but it did close at the high of the day and is supported by the indicators. MACD has confirmed the bullish signal and is moving higher with plenty of room for the index to run. My next target for resistance is at 1,400 although there may be a pocket of sell orders waiting at 1,350. Longer-term I see the energy moving substantially higher as oil prices rise and earnings estimates follow suit.

In The News, Story Stocks and Earnings

Shares of Google extended their rally today despite some bad news from the EU. EU regulators have levied a third antitrust fine against the world's largest search engine, this time for blocking the ads of rival advertisers. The fine is worth $1.7 billion but a drop in the bucket compared to what the company is making. Today's move was supported by yesterday's announced plan to build a gaming platform. The platform would leverage Youtube as a means for spectators to watch game-play (apparently some people like to). Shares of the stock gained 2.0%.

General Mills reported earnings before the bell. The iconic producer of packaged foods reports revenue and earnings above consensus. Revenue was driven by a 1% increase in organic sales along with a 2.3% improvement in margin. Results were mixed across segments with weakness in the EU, Australia, Latin America and China offset by strength in Convenience and Food Services. Guidance for the coming year was also above consensus calling for 9-10% revenue growth and 0-1% EPS growth. Shares advanced 2.5% in the premarket, doubled that gain intraday, but gave up some gains before the close.

Ford is doubling down on plans for the future. The company announced yesterday plans to increase production of SUVs, today the company announced plans to build a new factory for the production of autonomous vehicles. The plan, while bold, maybe a bit premature as it is expected to be operational in only two years. Shares of the stock fell more than -2.0%.

The Indices

The indices were up, down, and sideways in today's trading as hopes, fears, expectations, and reality vie for dominance. Today's biggest mover was the Dow Jones Transportation Average with a loss of -1.30%. The transports gapped down at the open, opening below the pair of moving averages, and moved lower from there. The only good thing about today's candle is the lower shadow which reveals the presence of buyers. The indicators are mixed but more bearish than not suggesting downward movement but within a trading range. In the near-term, it looks like the index will move down to the 10,000 level. In the longer-term, it looks like the 10,000 may be where firm, solid, market support is located.

The Dow Jones Industrial Average was the second biggest decliner with a loss of -0.54%. The blue chips created a small red candle moving down to support at the long-term uptrend line and so far support is holding. The indicators are mixed but momentum is bearish so I would expect to see the uptrend line tested again over the next couple of days. Support is possibly strong, it is confirmed by the short-term moving average, but with the transports leading the market lower, I see this index moving down to touch the long-term EMA.

The S&P 500 closed with a loss of -0.29% after a slightly volatile day of trading. The broad market index created a small doji candle with red body showing indecision but with a bearish bias. Today's action shows support is present along my uptrend line but momentum is bearish and stochastic is rolling over so it may be broken. A move below 2,810 may be bearish for the longer term but additional support targets exist just below along key moving averages.

The NASDAQ Composite posted the only gain in today's action, small as it was. The tech-heavy index closed with a gain of 0.06% after setting a three-day low and a five-month high in the same session. The action shows mounting indecision and resistance to higher prices although the indicators are bullish. Both MACD and stochastic are pointing to higher prices albeit weakly and with divergence. A move higher may be forthcoming but I'm not holding my breath right now.

If there is one thing I can say for certain it is that the market is indecisive. The good news is that one of the causes, the FOMC, is safely behind us for another six weeks (not counting Fed-speak). The bad news is that the main cause of global economic slowing, the U.S./China trade war, is far from over. Yes, there's been progress, sure a deal is getting closer, but no, it isn't coming in the next week or two and there are still hurdles to cross that may be insurmountable. Applying this to what really matters, earnings, we're starting to get some fairly dire warnings on further economic slowing (FedEx) and that my friends will weigh on outlook and equities. I am still firmly bullish for the long-term, still cautiously neutral in the near-term.

Until then, remember the trend!

Thomas Hughes

New Plays

Narrow Breadth

by Jim Brown

The Nasdaq posted a gain for the day, but decliners were 3:2 over advancers. Rarely does any index post a gain for the day when breadth is negative. Today was even worse than that Nasdaq breadth implies. The breadth on the S&P was grater than 2:1 in favor of advancers. The S&P lost 8 points and should have lost more but the big cap Nasdaq stocks were holding up not only the Nasdaq but the S&P as well. Amazon, Google, Netflix, Bookings, Intuitive, Tesla and Facebook were all up strongly. That was the majority of the points on the Nasdaq.

I looked at more than 300 individual charts again today and well over 95% were negative. The rest were neutral. The only charts with positive trends are the big cap tech stocks that are lifting the Nasdaq 100 and they are too expensive and option premiums too high to recommend. I am wary of the market after President Trump's comments on China today and the increasing volatility. I am not making any new recommendations. However, if you must buy something you could look at MNK, JKS, MYL or puts on KR.

Cash is a position when there is no dominant direction.

New positions are only added on Wednesday and Saturday except in special circumstances. NEW BULLISH Plays

No New Bullish Plays NEW BEARISH Plays

No New Bearish Plays

In Play Updates and Reviews

Tick Tock

by Jim Brown

Time may be running out on this rally as negative headlines outweigh positive ones. The Russell 2000 is the market sentiment indicator for fund managers, and it is turning negative. The index lost 12 points today and closed well under 1,550. The current pattern is shaping up for a lower low and a retest of 1,500. Currently it is still slightly bullish but another day or two in decline will turn it bearish.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow.
We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green.
We need to always be prepared for a profit exit at resistance.

Current Position Changes

No Changes

If you are looking for a different type of trading strategy, try these newsletters:

In early February Hain posted earnings of 14 cents that missed estimates for 25 cents. Sales declined -5% to $584.2 million and missed estimates for $611 million. All of the guidance was terrible. Shares fell 20% on the news.

Shares began to rebound almost immediately. The company announced an investor day for February 28th and it was well received. Two analysts posted positive notes about the company the following day.

The most bullish event was a four million share purchase in the open market but the biggest shareholder, Engaged Capital. Director Glenn Welling has purchased five million shares since the analyst meeting and both entities were still buying on Thursday. I see a potential takeover play ahead or at the least and activist shareholder play. Shares are exploding higher on the active buying.

Earnings May 9th.

Update 3/15: Shares are still rising but there has not been any additional insider buying since March 7th when Glenn Welling bought 1.8 million shares and Engaged Capital also bought 1.8 million. Those two entities bought 7,949,822 shares in the week ended on Mar-8th at an average price of $20.25. That is $160 million in new purchases Engaged now owns about 15%.

Position 3/11/19:
Long HAIN shares @ $21.44, see portfolio graphic for stop loss.
Optional: Long May $23 call @ $1.00, see portfolio graphic for stop loss.

Immunomedics, Inc., a clinical-stage biopharmaceutical company, develops monoclonal antibody-based products for the targeted treatment of cancer. Its advanced antibody-drug conjugates are sacituzumab govitecan and labetuzumab govitecan, which are in advanced trials for various solid tumors and metastatic colorectal cancer, respectively. The company focuses on commercializing sacituzumab govitecan as a third-line therapy for patients with metastatic triple-negative breast cancer in the United States. The company also develops IMMU-140, a humanized antibody directed against an immune response target. Its other product candidates include products for the treatment of cancer and autoimmune diseases, including epratuzumab, an anti-CD22 antibody; veltuzumab, an anti-CD20 antibody; milatuzumab, an anti-CD74 antibody; and IMMU-114, a humanized anti-HLA-DR antibody. Immunomedics, Inc. has clinical collaboration with AstraZeneca and MedImmune, to evaluate Imfinzi, a human monoclonal antibody against PD-L1, with sacituzumab govitecan as a frontline treatment of patients with TNBC and urothelial cancer; collaboration agreement with The Bayer Group for the development of epratuzumab; clinical and preclinical collaborations with academic cancer institutions, identifying new cancer indications for sacituzumab govitecan and the biology of the Trop-2 antigen; and research collaboration with the Memorial Sloan Kettering Cancer Center to investigate Sacituzumab Govitecan and Labetuzumab Govitecan in preclinical cancer models. Immunomedics, Inc. has a partnership agreement with the Samsung BioLogics Co., Ltd. to manufacture hRS7, an Immunomedics proprietary humanized antibody. The company was founded in 1982 and is headquartered in Morris Plains, New Jersey. Company description from FinViz.com.

Immunomedics has had a rocky year but they are starting to pull out of their funk. On February 26th they reported earnings but more importantly announced a complete changing of the guard with new board members, new CFO and the exit of the CEO. Shares spiked on the news.

On March 11th they presented at the Cowen and Company 39th Annual Health Care Conference. Shares spiked again. Investors apparently liked what they heard.

They have multiple drugs in the FDA approval process and several more in the research stage. Sacituzumab govitecan has demonstrated a significant clinical benefit in multiple hard-to-treat cancer settings including breast cancer. The company is currently preparing a new Biologics License Application (BLA) in response to the recent CRL from the FDA. They recently published in the new England Journal of Medicine regarding that drug in the treatment of a variety of epithelial cancers.

The company had $497 million cash on hand and enough for an additional two years of research and operations.

Earnings May 27th.

Shares have accelerated to the upside after the earnings and investor presentation.

Subsidiary AquaBounty (AQB) priced a secondary offering of 3,345,282 shares at $2.25 per share to raise $7.5 million. This has no impact on XON.

Original Trade Description: March 13th.

Intrexon Corporation engage in the engineering and industrialization of biology in the United States. The company, through a suite of proprietary and complementary technologies, designs, builds, and regulates gene programs, which are DNA sequences that consist of key genetic components. It provides reproductive technologies and other genetic processes to cattle breeders and producers; biological insect control solutions; technologies for non-browning apple without the use of artificial additives; genetically engineered swine for medical and genetic research; commercial aquaculture products; and preservation and cloning technologies. The company also offers UltraVector platform that enables design and assembly of gene programs that facilitate control over the quality, function, and performance of living cells; and RheoSwitch inducible gene switch that provides quantitative dose-proportionate regulation of the amount and timing of target protein expression. In addition, it provides AttSite Recombinases, which allows stable, targeted gene integration and expression; LEAP automated platform to identify and purify cells of interest, such as antibody expressing cells and stem cells; ActoBiotics platform for targeted in situ expression of proteins and peptides from engineered microbes; and AdenoVerse technology platform for tissue specificity and target selection. The company serves the health, food, energy, and environment markets. Intrexon Corporation has collaboration and license agreements with ZIOPHARM Oncology, Inc.; Ares Trading S.A.; Oragenics, Inc.; Intrexon T1D Partners, LLC; Intrexon Energy Partners, LLC; Intrexon Energy Partners II, LLC; Genopaver, LLC; Fibrocell Science, Inc.; Persea Bio, LLC; OvaXon, LLC; S & I Ophthalmic, LLC; Harvest start-up entities; and others. The company was formerly known as Genomatix Ltd. and changed its name to Intrexon Corporation in 2005. Intrexon Corporation was founded in 1998 and is based in Germantown, Maryland. Company description from FinViz.com.

Intrexon reported a loss of 22 cents that beat estimates for 29 cents. Revenue of $43.2 million declined 44% and missed estimates for $62 million. It was not a good report.

The company's primary revenues come from collaboration and licensing along with some product and service revenues. Collaboration and licensing revenues declined 55% to $25.2 million. These revenues can be very sporadic which means some earnings reports can be ugly. However, the auditor is considering a "going concern" statement in the financials.

The company has $224 million in cash on hand and multiple streams of cash flow from these collaboration and licensing efforts. The CEO said there were multiple efforts underway to develop new revenue streams.

Last week, Bill Miller, of Miller Value Partners, a $2 billion investment fund, tweeted that current efforts underway could make the company worth many multiple of the current stock price. Shares began to rebound from the post earnings beating.

On March 8th, AquaBounty (AQB) a wholly owned subsidiary of XON, received permission from the FDA to import fish eggs from Canada and raise salmon in Indiana. I do not understand what is special about these eggs but shares of AQB spiked sharply.

I am recommending we follow Bill Miller and see if this inexpensive stock can at least return to the pre earnings levels.

Position 3/14//19:
Long XON shares @ $5.61, see portfolio graphic for stop loss.
Optional: Long July $6 call @ $.95, see portfolio graphic for stop loss.

The investment seeks return linked to the performance of the S&P 500 VIX Short-Term Futures Index TR. The ETN offers exposure to futures contracts of specified maturities on the VIX index and not direct exposure to the VIX index or its spot level. The index is designed to provide investors with exposure to one or more maturities of futures contracts on the CBOE Volatility Index. Company description from FinViz.com.

The VXXB is a short-term volatility ETN based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETN. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, the prior VXX ETN had done five 1:4 reverse stock splits. The last five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from experience that the VXXB and its predecessor the VXX always decline long term.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETN and forget it. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable, I may put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

The VXXB will be hard to short. The shares are out there and being traded because the volume on Thursday was 22.1 million. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

Position 2/1/19:
Short VXXB shares @ $35.33, see portfolio graphic for stop loss.